CEE private equity: undervalued?

It is official: Central and Eastern Europe is unsexy. It is the least desirable geography for family offices to invest in, according to the Investec Family Office Intelligence Survey, an unquote" sister brand, conducted in March. Less than a quarter of respondents were keen to back the region, while three quarters thought Asia was the best destination.

It should mean that competition to get into the top funds is minimal – a very different situation to the last generation of fundraising there. During the 2006-2008 fundraising frenzy, some erstwhile loyal LPs were politely declined access to fund managers as larger institutions with deeper pockets were prioritised. The result of this record interest was swollen fund sizes and ultimately geographic spillover, as the popular fund managers scrambled to put the money to work in markets new to them.

The upshot of all this was a lacklustre vintage of funds, meaning many institutions felt burned by their first foray into the region. Today's backdrop of slowing growth and political mayhem in some countries (namely Hungary and now Bulgaria) makes investor reticence understandable.

Smart money
This is great news for investors convinced of CEE's merits. Not only will competition to access chosen fund managers be less intense, but smaller funds could mean a return to core markets – where CEE fund managers harvested their best returns in the early 2000s. It should also mean fewer funds will raise, leaving only the fittest to pursue deals in what many are heralding as a stellar vintage.

Some of these factors are common to the rest of Europe; particularly the Darwinian shake-up of the GP landscape. But others are unique to CEE – namely GDP (still) growing faster than in western Europe; relatively low government debt levels and proximity to the higher-growth markets in CIS and Turkey. While this sounds like an emerging market-esque beta play, it is important to note that the region, unlike any other emerging market, has a generation of seasoned fund managers with 15-20 years of experience - meaning alpha should be within closer reach.

The region hosted some of 2012's outstanding European exits: the flotation of Czech software business AVG ended Europe's 10-month private equity-backed IPO dry spell, rewarding a handful of local GPs. International house CVC made headlines with the trade sale of StarBev, a regional brewer, and local GPs Mid Europa and Mezzanine Management scored the region's largest exit in years when they sold Lux-Med to Bupa, highlighting the international allure regional companies have. Just today unquote" reported that Enterprise Investors made 9x money on Polish business Kruk after a 10-year hold period - this should go a way to buttressing its latest fundraise. The firm held a first close in the autumn and a final is slated within the next couple months, according to an LP.

That CEE is undesirable to non-experts makes it a strong prospect for those in the know. Here's to CEE's next strong vintage.

Join unquote" on 25 April in Warsaw for the seventh annual CEE Private Equity Forum (www.ceepecongress.com).

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